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5 Reasons to Avoid U.S. Stocks

The recent rally in U.S. stocks was the sharpest such surge since 1644, just before the Ming Dynasty collapsed and an outbreak of bubonic plague claimed hundreds of thousands of lives in Europe.

Another rally that resembles last week’s almost vertical climb in the S&P 500 was the rebound in shares in the South Sea Company in September 1720…just before the South Sea bubble finally popped and prices fell by about 80%.

The fact is the S&P 500 rose in a near vertical line last week. And anyone with even a passing familiarity with market history knows that any asset that rises like this is susceptible to an equally sharp fall.

Why should we care about this here at International Living Investor? After all, our beat isn’t what’s happening in the U.S. For us, it’s what’s happing outside the U.S. that counts.

The reason I am bringing this to your attention is that right now there is a lot of dangerous talk on Wall Street and in the mainstream financial media about a “recovery” in the U.S.

And this is luring a lot of unsuspecting investors back into U.S stocks…the same investors who were hit by the dot-com crash at the end of the 1990s and the stock market crash of 2008.

Before you buy the line that the recent one-week rally in U.S. gives you the “all clear” to dive back into Wall Street stocks, here are five things you should know.

5 Reasons to Be Cautious about U.S. Stocks Now

1) Speculative rallies don’t last – When you the price of any asset shoots up in an almost vertical line it is almost always the result of a speculative rally…not of any fundamental shift in underlying conditions. By definition, speculative rallies don’t last.

2) Much of the rally was due to “window dressing” – The recent rally happened right at the end of the second quarter, when professional money managers have to report their results. Stocks often rally at the end of a quarter due to money managers engaging in a little “window dressing” – in other words, juicing up their results by all piling into stocks at once.

3) It’s the dollar, stupid – One of the big reasons why U.S. companies were able to deliver strong earnings results in the first half of the year was because the Fed did such a good job of driving down the exchange value of the dollar versus other major currencies.

As the Fed drove the dollar lower by way of its “quantitative easing” (QE) program, profits earned in other currencies rise. Also, U.S. exports are cheaper in global terms, making U.S. products more competitive abroad.

The problem is the Fed wound down its QE program at the end of June. And fears of a collapse in the euro may drive the U.S. dollar higher. This would pose a huge challenge for U.S. companies striving to meet next quarter’s earnings estimates.

4) Gold is waving a red flag – Despite the recent surge in stock prices, gold has also been in rally mode. This is odd. Because holding gold is “disaster insurance” for when things go badly wrong in the world.

If this were a genuine recovery…and a genuine bull market in stocks…investors would be dumping their disaster insurance and buying stocks instead. Only today, gold rose by $12/oz, bringing the yellow metal close to its all time nominal high of $1,570.80/oz. This does not auger well for the rest of the economy.

5) No structural solutions to America’s debt problem – Democrats and Republicans continue to clash over the solution to the country’s chronic debt problem. Still no deal has been reached on raising the debt ceiling from $14.3 trillion.

If a deal isn’t struck soon, the U.S. will be forced to default on its outstanding debt. And if a deal is struck, it will likely mean less government spending… and therefore less money in the U.S. economy.

This isn’t exactly what America’s 14 million jobless need. And unless the jobless situation in America is fixed, consumers will continue to pull in their horns…sucking even more money out of the system.

Right now, mainstream pundits and Wall Street money managers are pulling a typical “rear view mirror” move. They’re looking at the recent rally and extrapolating those gains out into the future.